Economics

Economics v politics

A self-induced recession

YOU know, if it weren't for the politicians, the economy would have a fighting chance.

The probability of recession spiked in early August as financial markets around the world swooned and American economic momentum abruptly drained away. Since then, the economic data have not, for the most part, gone into freefall. This morning we learned the Institute for Supply Management's manufacturing purchasing managers index rose to 51.6 in September from 50.6, modestly better than expected; current production is growing but new orders are weakening slightly. Construction spending was also quite a bit better than expected in August, with across the board strength in residential, commercial and government. Third quarter growth rates have been revised up. Indeed, as this chart from Macroeconomic Advisers shows, consensus third quarter growth estimates between late August and last Friday generally edged higher. Update: U.S. auto sales in September came in above expectations, according to Autodata: 13.1m annualized units, v 12.1m in August.

But last week the Economic Cycle Research Institute (ECRI), a boutique firm that specialises in business-cycle turning points said America is “tipping into a new recession. And there's nothing that policy makers can do to head it off.” ECRI is not well known to the general public but at times like this I pay them special attention because their indicators are designed to capture turning points and their track record is pretty good.

Their full report is only available to subscribers so I'm guessing the recessionary behaviour of stock and bond markets is a key contributor to this call. And what bothers me is that financial markets are responding primarily not to economic but to political developments. Europe's perverse insistence on austerity, stemming from a wholly erroneous diagnosis of the cause of its crisis (as this article from The Economist succinctly notes), coupled with doubts about their banks' ability to withstand sovereign bond losses, is pushing the continent's economy into a completely unnecessary recession.

In America, the biggest policy-related threat is the fiscal tightening that will happen automatically in the next four months as prior stimulus expires and legislated cuts to discretionary spending bite. Barack Obama has proposed $447 billion in new or renewed stimulus to neutralise that threat, but it requires an ambitious deal in Congress' super committee, and odds of such a deal by its November 23rd deadline are shrinking. Democrats are reportedly trying to get it to consider tax hikes immediately, and Republicans are apparently saying that puts a big deficit reduction deal out of reach.

A global economy with decent cyclical fuel and no obvious imbalances is being betrayed by politics. Policy has pushed us over the brink in the past when it was for our own good (ie, inflation was threatening). If it happens now, it will be the first recorded instance of it happening by obduracy instead of by choice.

Politicians have caused the recession to become much worse than it could have been. They are making statements that cause authority makers to make the wrong decisions or second guess their policies. This recession is in fact self induced because of the politicians corrupting the economy. If they just stay out of it and let the president and others do their jobs then we may have a fighting chance.

At this point government stimulus will not work. At the beginning of a recession it might help buy picking up slack and and maintaining a level of confidence, but its the markets that readjust and eventually get us out of a recession. Governments can only minimize the pain until the markets adjust. This late in the recession all they can do is make things worse by trying to prevent needed corrections.

Agreed. The housing bubble was created mostly by politics. Its been good politics to increase home ownership for years, so politicians have been getting rid of market checks on who should and should not own a home. The result was artificially increased demand and unnaturally high prices.

The politicians should get out of the way and let the deficit be freely driven by private sector net saving to pay off the private sector debt overhang sooner rather than later. Artificially trying to repress the deficit represses the private sector's net saving debt paying down desires and prolongs the agony.

If the deficit is allowed to mirror net private saving desires to pay off debt it will provide the fund through increased net spending to do so.